The Impact of Pensions on Non-Pension Investment Choices

Leora Friedberg, University of Virginia
anthony webb, Center for Retirement Research at Boston College

Abstract

The displacement of traditional defined benefit (DB) pensions with defined contribution (DC) pensions over the last two decades has transferred the risks associated with accumulating pension funds from employers to workers. We analyze how investment choices outside of pensions have been influenced by the shift in pension structure.

Workers with DB plans, bearing less investment risk, should invest less conservatively outside of their pensions. Yet, those with DC plans in the 1992 Health and Retirement Study invest more in the stock market, possibly because workers with a greater preference for risk sort into jobs with DC plans. On the other hand, we observe that the longer that workers in 1992 have been in their DB plans, the more that they invest in the stock market. This accords with the substantial reduction in risk associated with accruals of DB wealth that workers experience the longer they stay in their jobs. Moreover, endogenous sorting should bias against this finding that tenure in DB plans raises risk-taking. The difference between the estimated effects of tenure in DB versus DC plans in 2004 is similar to 1992, while the results indicate that both types of pension plans are perceived as riskier in 2004.